Bank for International Settlements quarterly health check warns global economy resembles era just before financial crash
Investors are ignoring warning signs that financial markets could be overheating and consumer debts are rising to unsustainable levels, the global body for central banks has warned in its quarterly financial health check.
The Bank for International Settlements (BIS) said the situation in the global economy was similar to the pre-2008 crash era when investors, seeking high returns, borrowed heavily to invest in risky assets, despite moves by central banks to tighten access to credit.
The BIS, known as the central bankers bank, said attempts by the US Federal Reserve and the Bank of England to choke off risky behaviour by raising interest rates had failed so far and unstable financial bubbles were continuing to grow.
Claudio Borio, the head of the BIS, said central banks might need to reconsider changing the way they communicated base interest rate rises or the speed at which they were increasing rates to jolt investors into recognising the need to calm asset markets.
The vulnerabilities that have built around the globe during the long period of unusually low interest rates have not gone away. High debt levels, in both domestic and foreign currency, are still there. And so are frothy valuations.
Whats more, the longer the risk-taking continues, the higher the underlying balance sheet exposures may become. Short-run calm comes at the expense of possible long-run turbulence, he said.
The warning came as Neil Woodford, one of the UKs most high-profile fund managers, said stock markets were in danger of crashing, resulting in huge losses for millions of people.
The founder of Woodford Investment Management, which manages 15bn worth of assets, told the Financial Times that investors were at risk of the market experiencing a repeat of the dotcom crash of the early 2000s.
Woodford said he was concerned that historically low levels of interest rates in most developed nations over the last decade were pushing asset prices to unsustainable levels.